Example Of Report On Financial Accounting
Cash is Key-An introduction
If ‘’ Cash is key’’ or if the profit is, this shall be the most debated question in every corporate book or discussion. It is undisputable that each of them has their own utility and no matter if the company is large-cap stock or small-cap, the long-term objective is the maximum profit only. Said in a different manner, whenever a business unit is start-up, the entrepreneur calculates his input cost, the selling cost and what will be the difference, i.e. the profit he will earn. Thus, every business house is genetically trained to think of profit only.
However, what if the company earns only profits but has no cash in bank to pay the bills and other expenses? Hence, above profit, the businesses need cash and now, the adage- Cash is King, is used to describe the importance of cash in today’s business environment. This is because, if we have cash, we can reinvest in the business, pay our bills, labor salaries, et cetera. Thus, even if the company is recording millions in profits but the cash position is the lifeline of every organization as in the environment of low cash position, the company can soon become bankrupt too.
Why cash is important- An illustration
Assuming, Firm A managed to earn a contract of $10 Million with the total costing involved of $5 Million only. However, the terms of the contract are that he will claim proportional profits only after the work completed exceeds 50%. He begins the work with cash reserve of $100000.
Thus, although the project overall was profitable to the firm, but because of the existing contract terms, they could not ask for money from the company and this left them short of cash resources. As a result, company went out of business.. Thus, despite the contract was profitable for his firm, but no cash inflow and subsequently running out of capital to pay for the expenses of the company, resulted in insolvency.
Income Statement Variance Analysis:
Variance in Revenue Mix:
Referring to the income statement of the company, we find that the revenue is made up of multiple items and is primarily dominated by the revenue sourced from the ticket sales of events organized by the company. The revenue from the ticket sales accounts for 43.66% of the total revenue figures of the company followed by sponsorships and donations that accounts for 35.15% of the total revenue figures. However, during 2014, the company could not meet its budgeted amount and fell short by $519043 while in comparison to 2013, the total revenue increased by 10.51%.
Variance in Cost Profile:
In terms of costing, the company achieved their budgetary targets, rather they performed well than what they expected. During 2014, the company spent the maximum amount on the infrastructurre and production that accounts for 58.01% of the total cost of sales, followed by events and workshops expenses that accounted for 19.84% of the total cost of sales. Overall, the total expenditure by the company was appreciable as the total amount of cost of sales of $3051539 was $180109 less than the budgeted amount.
Budget Remodelling in the company:
As for the remodeling in the company, the organization in their annual report has stated that they are working towards improving their budget models so as to identify and eliminate their unnecessary expenses. From the discussion above related to zero-based and top-down budgeting approaches, we can infer that the company can benefit by employing a suitable budgeting model. In the case of Syndey Mardigrass, I believe that employing zero-based budgeting will turn more prudent than top-down approach as each department will be given a chance to justify their needs of higher budgets.
In this section, we will be analyzing the financial performance of Sydney Gay and Lesbian Mardi Grass Limited for the year 2013 and 2014. In order to achieve a comprehensive analysis, we will be using the tool of ratio analysis, where different set of ratios, namely, Liquidity Ratios, Profitability Ratios, Solvency Ratios and Efficiency Ratios will be discussed for the said years.
Also known as Pure Balance Sheet Ratios, these ratios assists the analysts in figuring out the ability of the company to honor their short-term debt obligations as and when they become due. Below calculated and discussed are the two liquidity ratios of the company:
i)Current Ratio: Current Assets/ Current Liabilities
2013: 1349310/616878= 2.18
2014: 1761486/1233909= 1.42
ii)Acid Ratio: Cash+ Receivables/ Current Liabilities
2013: (880728+371288)/616878= 2.02
2014: (1110782+586678)/1233909= 1.37
Noted from the above analysis, we can witness that during a year, the liquidity position of the company has gone worse as both the current ratio and acid ratio has declined over the year. As for the current ratio, the multiple declined from 2.18 to 1.42 courtesy 100% increase in the current liabilities while the current asset base soared only by 50.34%.
We even tested the liquidity using the stringent measure of acid ratio and found the same results where increase in the cash and receivables amount was offset by significant rise in current liabilities.
Overall the company has tarnished their liquidity position during 2014 and if the trend continues, the company might soon face liquidity crisis.
Another set of ratios that carries great significance for all the stake holders of the company as it indicates the level of margins being earned by the company. Even the market analyst keeps a close watch on the profitability announcements by the company. Below calculated and discussed are few profitability ratios of the company:
i)Net profit Margins: Net Income/ Revenue
2013: 45693/4318593= 1.05%
2014: 177644/4772598= 3.72%
ii) Return on Equity: Net Income/ Total Equity
2013: 45693/874339= 5.22%
Referring to the calculations above, we can witness that during a year, the profitability position of the company has gone strong with net income margins surging from 1.05% in 2013 to 3.72% in 2014. Even the shareholders of the company will be ecstatic to witness a significant rise in the ROE multiple that jumped from 5.22% to 25.48% in 2014. It is noteworthy to comment that increase in ROE was majorly sourced from decline in total equity, but increase in net income was also a major contributor to the same.
Thus, in the nutshell, the trend in profitability position of the company is surely encouraging.
Also known as Asset Management Ratios, these ratios indicated how well the management of the company is utilizing the asset base to generate revenue for the company. Below calculated and discussed are few of the efficiency ratios of the company:
i) Payable Period: 365* Total trade payables/ Credit Purchases
2013: 365*596170/(75%*2745380)= 105 Days
2014: 365*1207833/(75*3051540)= 192 Days
ii)Receivables Period: 365* Total trade receivables/ Credit Sales
2013: 365*371288/(40%*4318593)= 78 Days
2014: 365*586678/(40%*4772598)= 112 Days
Referring to the calculations above, we can infer that over the period of one year, the company has lost efficiency relating to management of their trade payables and receivables. As for trade payables period, during 2013, the company was paying its short-term bills in 105 days which later increased to 192 days in 2014. This can be associated with poor liquidity which we noticed in the very first section.
Similarly, as for trade receivables, during 2013, the customers were paying down their bills in 78 days. However, the time period increased to 112 days as the debtors of the company went more slow in making their payments.
Thus, we can interpret that if this trend continues, the company might soon face some serious liquidity crisis and even the creditors may not offer favorable credit terms to the company because of deteriorated payment period.
Note: Since the company does not have debt position in its capital structure, we have not discussed the gearing ratios in our analysis.
Conclusion: Comparing Net Margins and Current Ratio
Noted from our calculations above, we can infer that undoubtedly the profitability of the company has improved over the period of one year, however, the liquidity and efficiency position seems to be alarming. For Instance, if we look at the net margin ratio, the multiple increased from 1.05% to 3.72%. However, if we look at the current ratio, the multiple took a half way decline from 2.18 to 1.42 only.
Thus, the company needs to work on its working capital position by adopting rigorous collection methods from its debtors as this will also improve its liquidity and assist in paying-off its creditors in an appreciable time period.
Should we focus on generating more of a cash or more profits?- this might be the most asked question in every business house. While each has its own utility or a purpose to serve, we will try to find out as which one is more important for an organization.
Every company whether small-cap or large-cap, will have a long-term objective of earning maximum profits. Whenever a business is set up, the entrepreneur will always think at what cost he is purchasing the material, what he could sell it for and what are the profit margins he will earn. Hence, we are trained to think of business as sales minus costs and expenses, which is a profit.
Unfortunately, businesses cannot spend profits and what they need is cash. ’Cash is King’’-this adage is used to describe the importance of cash in today’s business environment. If we have cash, we can pay our bills, our liabilities and the leftover money can be used for the purpose of re-investment also. Overall, the cash position of the company is undoubtedly very critical for every organization. Although we stated in the introductory paragraph that entrepreneur thinks of profit, but undoubtedly, it is the cash that is the lifeline of the business as no business unit can survive without cash or sufficient working capital. Hence, even if the company is earning millions in net profits but has negative cash position, this means that it could not pay even their expenses and can soon become bankrupt.
Why cash is important- An illustration
Let us assume that a construction firm has earned a contract of $10 million that will actually cost him $6 million. However, the terms of the contract are that he will claim proportional profits only after the work completed exceeds 50%. He begins the work with cash reserve of $100000.
At the end of year 1, he was able to complete only 30% of the work while is annual expenses amounted to $75000 which he paid from his own capital of $10000. At the end of year 2, because of technical difficulties he could only complete 45% of the total work while his annual expenses remained steady at $75000.
Hence, because of the terms of contract he could not claim any cash profits from the company and because of his inability to pay expenses during year 2, he went out of business. Thus, despite the contract was profitable for his firm, but no cash inflow and subsequently running out of capital to pay for the expenses of the company, resulted in insolvency.
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Sydney Mardi Gras. (2014). Annual Report 2014. Sydney.